Zurich Insurance Group Ltd · SIX:ZURN
Zurich Insurance — Zurich Financial Services — Investor Day (June 2005)
137 slides from Zurich Insurance's investor day presentation, Jun 30, 2005
Slide 1: Claims management and reserving
Claims management and reserving Investors’ Day London, June 30, 2005
Slide 2: Disclaimer and cautionary statement
Disclaimer and cautionary statement Certain statements in this document are forward-looking statements, including, but not limited to, statements that are predictions of or indicate future events, trends, plans or objectives. Forward-looking statements include statements regarding our strategic dire
Slide 3: Agenda
Agenda • Introduction John Amore • Claims management − Driving performance in claims Jane Tutoki − The Zurich Way roll-out in European claims Lutz Bauer − Conclusions John Amore • Q&A • Reserving − Introduction Patrick O’Sullivan − Overview and The Zurich Way of reserving Steve Wilson − European res
Slide 4: Introduction
Introduction John Amore CEO, General Insurance
Slide 5: Objectives of today's presentation
Objectives of today’s presentation • On January 20, we showed you how we transformed Zurich to be an underwriting company • Today, we will show you how we achieve − technical excellence in claims management and − best practices in reserving • In both areas we will highlight the changes that we have
Slide 6: Organization configured to maintain operating discipline and focus on Claims
We have configured our organization to maintain the operating discipline and focus on Claims … NA Comm. Europe GI Global Corp. International Tim Mitchell Underwriting CEO General Insurance (CUO) Jane Tutoki Claims (CCO) Hanspeter Frei Risk Engineering (Chief RE) • Dual reporting of key management ro
Slide 7: Contribution to the Group's overall improvement benefits
…as it increasingly contributes to the Group’s overall improvement benefits 100% = 100% = 100% = USD 1 billion USD 540 million USD 500 million 8% 4% 19% Life, AM & other 12% 15% 5% Growth/Distribution 13% 20% 23% Claims 31% 26% Underwriting Process 60% Pricing 7% 37% Operating Expenses 20% 2003 2004
Slide 8: The Zurich Way maximizes financial benefits while supporting customer experience
The Zurich Way maximizes financial benefits while supporting customer experience Claims Best Practices Loss cost containment • Talent Management • Indemnity expense • Technical Excellence • Loss adjustment expense • Efficiency & Effectiveness Customer satisfaction • Customer Focus • Better service s
Slide 9: Driving performance in Claims
Driving performance in Claims Jane Tutoki Chief Claims Officer, General Insurance
Slide 10: Claims' performance is important to our improvement initiatives
Claims’ performance is important to our improvement initiatives USD 1 billion USD 540 million USD 500 million USD 80m USD 81m Life, AM & other Growth/Distribution USD 115m Claims Underwriting Process Pricing Operating Expenses 2003 2004 2005 © Zurich Financial Services - Investors’ Day, June 30, 200
Slide 11: Improved performance across the major levers in claims
We have improved performance across the major levers in claims • Reduced cycle times • Consistent service standards • Enhanced customer-facing service level agreements Customer experience Expense Indemnity management management • Vendor management • Improve efficiency through • Streamline operations
Slide 12: Outperforming the industry in personal lines claim costs in North America
We are outperforming the industry in personal lines claim costs in North America … North America – personal lines example: Farmers Exchanges Homeowners - Indexed average claim cost Auto PD – Indexed average claim cost 190% 125% 180% 170% 120% 160% 115% 150% 140% 110% 130% 120% 105% 110% 100% 100% 20
Slide 13: … and also in Germany
… and also in Germany Europe – personal lines example: German motor Motor TPL Full comprehensive cover Semi-comprehensive cover EUR EUR EUR 3,500 2,000 1,000 3,400 1,900 900 3,300 1,800 800 3,200 1,700 700 3,100 1,600 600 2001 2002 2003 2001 2002 2003 2001 2002 2003 Zurich Industry1 1 Market figures
Slide 14: Claims leakage is an important performance metric
Claims “leakage” is an important performance metric What is leakage…? 6 4 100 90 Actual Payout Leakage Appropriate Payout (Total payout by adjuster) (Total payout consistent with best practices) Hard Leakage: Soft Leakage: Objective errors (e.g. missed Errors in judgment (e.g. potential for deductib
Slide 15: NA Corp. initiatives driven performance against leakage baseline
At NA Corp. a successful set of initiatives has driven performance against leakage baseline Leakage in percent Liability Property Workers’ Comp Total 11.6 9.5 9.9 7.2 5.7 6.3 5.8 5.0 4.3 4.3 4.0 3.7 3.8 3.6 3.1 2.7 2005 YTD 2005 YTD 2005 YTD 2005 YTD 2003 year-end 2004 year-end 2003 year-end 2004 ye
Slide 16: Leakage as part of a continuous improvement cycle
We use leakage as part of a continuous improvement cycle Continuous improvement cycle Example Leakage Identify Implement in % leakage solutions to opportunity capture leakage Baseline Baseline Initial Measure & New Drive set higher performance expectation up Time © Zurich Financial Services - Invest
Slide 17: Global Chief Claims Officer – New mandate and authority
Global Chief Claims Officer – New mandate and authority Grant Claims Authorities Set & monitor claims standards and governance • Govern each responsibi- Monitor & measure lity globally and monitor Global performance local application CCO Implement best practices • Direct reporting relation- ship wit
Slide 18: The Zurich Way embeds common metrics and management approach
The Zurich Way embeds common metrics and management approach Our five areas of claims management focus Talent Technical Efficiency and Customer Functional Management Excellence Effectiveness Experience Collaboration Structured process for Continuous Improvement and Performance Management Common metr
Slide 19: Summary
Summary • Claims is an important component of the operational improvement program • We have configured the organization and committed as a management team to drive continuous improvement in Claims • We are institutionalizing our improvement program through The Zurich Way framework creating consisten
Slide 20: The Zurich Way roll-out in European claims
The Zurich Way roll-out in European claims Lutz Bauer Chief Claims Officer, Europe General Insurance
Slide 21: The Zurich Way drives consistent claims management
The Zurich Way drives consistent claims management Common language and methodologies Identify Implement Value Capture Opportunities Solutions (Measure/Monitor) • File Reviews • Business Cases • Clear metrics • Process Reviews • Processes − Operational • “Round tables” • Technology − Financial • Peop
Slide 22: Scope and timeline of the European General Insurance claims effort
Scope and timeline of the European General Insurance claims effort • 2002 – 2003 improvement initiatives managed locally (Business Units) • 2004 institutionalized The Zurich Way in European Motor • 2005 Roll-out of European Property and Liability © Zurich Financial Services - Investors’ Day, June 30
Slide 23: We use three diagnostic tools
We use three diagnostic tools Identify Implement Value Capture Opportunities Solutions (Measure/Monitor) Closed File Review Process Analysis • Quality review • Map the organization • Representative • Assess current state and best sample of files practices Large Claims Analysis • Expert assessment in
Slide 24: Substantial change across and within the business divisions
We have driven substantial change across and within the business divisions The five areas of management focus Talent Technical Efficiency and Customer Functional Management Excellence Effectiveness Experience Collaboration From To • Claims management in • Consistent approach to claims country-specif
Slide 25: Substantial change across and within the business divisions
We have driven substantial change across and within the business divisions • We have identified 150 improvement points across Europe (e.g. fraud, recovery, etc.) • Two specific operational examples − German Motor: Assessment and repair management − UK Commercial Motor: Early claims notification © Zu
Slide 26: Example – German Motor: Assessment and repair management
Example 1 – German Motor: Assessment and repair management Value Capture Identify Opportunities Implement Solutions (Measure/Monitor) • Use of external • Rigorous review of Average assessment1 assessors leads to external assessments higher indemnities • Increase use of internal Baseline2 3,000 • Los
Slide 27: Example – UK Commercial Motor: Early claims notification
Example 2 – UK Commercial Motor: Early claims notification Value Capture Identify Opportunities Implement Solutions (Measure/Monitor) • Late notification: • Customer and Broker Days from accident to − Increases overall cycle communication and notification time „education“ Baseline1 48 − Impairs inve
Slide 28: Conclusion
Conclusion • The Motor claims initiative has added remarkable improvements − Financials benefits − Customer experience − Organizational progress • The Zurich Way process has proven its effectiveness • We are now rolling out The Zurich Way on Property and Liability in Europe • European claims will co
Slide 29: Conclusions – Claims management
Conclusions – Claims management John Amore CEO, General Insurance
Slide 30: Driving performance in claims strengthens our franchise
Driving performance in claims strengthens our franchise Enhanced Governance ili ty t ab fi Best Practice P ro Processes & Metrics Excellent Customer Service and Experience Focus on Leakage e abl Improvement and Excellence s t ain Su in Execution © Zurich Financial Services - Investors’ Day, June 30,
Slide 31: Reserving
@ ZURICH FINANCIAL SERVICES Reserving
Slide 32: Reserving - Agenda
Reserving - Agenda • Introduction Patrick O’Sullivan • The Zurich Way of Reserving Steve Wilson • The Zurich Way impact in 2004 Steve Wilson • Europe Caroline Barlow • North America Nancy Mueller • Conclusions Patrick O’Sullivan © Zurich Financial Services - Investors’ Day, June 30, 2005 32
Slide 33: Introduction
Introduction • In 2004, we took significant steps to strengthen reserving • Today, we will cover 4 topics Strengthened reserve governance Best practice actuarial approach Historical strength of our European reserve Significantly strengthened US reserves © Zurich Financial Services - Investors’ Day,
Slide 34: Strengthened governance by segregating controls from operations
Strengthened governance by segregating controls from operations • Clear segregation of controlling functions from business activity • Applying the principles of The Zurich Way to the reserving process • Significant Group oversight of local actuarial units • Harmonization of actuarial approach Busine
Slide 35: New approach created step-change in reserving
New approach created step-change in reserving Dec 31, 2002: USD 30.4bn Dec 31, 2003: USD 37bn Dec 31, 2004: USD 43.5bn NA Corp. Cont. Europe UKISA NA Cons. RoW CMB in USD millions Cont. NA Corp. Europe UKISA NA Cons. RoW CMB Total 2002 9,384 8,836 6,075 746 897 4,428 30,366 2003 12,005 10,628 8,212
Slide 36: Reserves - Agenda
Reserves - Agenda • Introduction Patrick O’Sullivan • The Zurich Way of Reserving Steve Wilson • The Zurich Way impact in 2004 Steve Wilson • Europe Caroline Barlow • North America Nancy Mueller • Conclusions Patrick O’Sullivan © Zurich Financial Services - Investors’ Day, June 30, 2005 36
Slide 37: The Zurich Way of reserving is a global process
The Zurich Way of reserving is a global process • Governance • Organisation • Process flow • Technical © Zurich Financial Services - Investors’ Day, June 30, 2005 37
Slide 38: We have strengthened governance
We have strengthened governance • Quarterly reserve committees − Business Division and Group − Recommendations to management recorded − Full transparency and accountability to Group Finance Director • Expanded reserve policy manual − Actuarial documentation formally part of the process • Group Chief
Slide 39: Actuarial function integrated globally
We have integrated the actuarial function globally From locally driven To central control Local Group Chief Local Group Chief CEO / CFO Actuary CEO / CFO Actuary Management Functional Local Divisional Chief Actuary Chief Actuary • Hard line matrix reporting of local actuaries into the Group • Talent
Slide 40: Full transparency and reserve positions approved at Group level
We have full transparency and all reserve positions are approved at Group level Group End-to-end oversight by Group Chief Actuary • Guidance for consistency Group Reserve • Ensure actuarial compliance Committee • Chaired by GFD General • Global view Insurance • Consistent position Segment • Understa
Slide 41: We apply actuarial best practice
We apply actuarial best practice • Chain-ladders on paid and incurred • Bornhuetter-Ferguson on recent accident years for long-tail • Average cost / claim count methods when data permits • More advanced techniques when needed − E.g. tail development curves & meso projections © Zurich Financial Servi
Slide 42: Review and feedback is essential – as is data segmentation
Review and feedback is essential – as is data segmentation • Core methods semi-annually / annually • Rolling peer reviews • Diagnostics quarterly / monthly • Early warning indicators • Assess accuracy of assumptions • Detailed segmentation into homogeneous cells − Isolate trends − Group cells with s
Slide 43: Reserves are validated by major external firms
Reserves are validated by major external firms • Major consulting firms hired by Group to − Validate our views − Provide an extra layer of control for Group − Provide specialist or market knowledge • Our reserves are based on our own estimates and the process addresses any material differences from
Slide 44: Conservative initial reserves: UK all lines run-off
We aim for conservative initial reserves: UK all lines run-off demonstrates this 73% Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Ultimates at year-end 2000 73% 82% 91% 88% 76% 2001 73% 81% 90% 88% 79% 80% 2002 72% 80% 87% 87% 81% 78% 75% 2003 72% 80% 87% 87% 80% 75% 71% 65% 2004 71% 8
Slide 45: Key ratios show increase in initial reserve strength for North America
Key ratios show the increase in initial reserve strength for North America • Initial reserve-to-initial ultimate expressed as a percentage − strong indicator of opening reserve strength − not distorted by premium rate levels • Hindsight initial reserve-to-ultimate percentage − retrospective view of
Slide 46: Initial reserve-to-initial ultimate by accident year
Initial reserve-to-initial ultimate by accident year as at end of year and with hindsight Zurich US – all lines combined net before stop loss Ratio of initial reserve-to-initial ultimate 80% 75% 70% 65% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years © Zurich Financial Service
Slide 47: Initial reserve-to-initial ultimate by accident year
Initial reserve-to-initial ultimate by accident year as at end of year and with hindsight Zurich US – all lines combined net before stop loss Ratio of initial reserve-to-initial ultimate Hindsight adjustment 80% 75% 70% 65% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years © Z
Slide 48: Initial reserve-to-initial ultimate by accident year
Initial reserve-to-initial ultimate by accident year as at end of year and with hindsight Zurich US – all lines combined net before stop loss Ratio of initial reserve-to-initial ultimate Hindsight adjustment 80% 75% 70% 65% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years • A
Slide 49: Reserves - Agenda
Reserves - Agenda • Introduction Patrick O’Sullivan • The Zurich Way of Reserving Steve Wilson • The Zurich Way impact in 2004 Steve Wilson • Europe Caroline Barlow • North America Nancy Mueller • Conclusions Patrick O’Sullivan © Zurich Financial Services - Investors’ Day, June 30, 2005 49
Slide 50: 89% of our reserves are in Europe and North America
89% of our reserves are in Europe and in North America • Reserves have grown due to Dec 31, 2004: USD 43.5bn net reserves − volume growth – in hard market − more conservative assumptions NA • Divisional Chief Actuaries UKISA Corp. have 22% 40% − regional responsibilities Cont. − Business units actua
Slide 51: Impact in 2004
Impact in 2004 • Significant strengthening in Prior year in USD millions devt North America NA Corporate 2,565 • Asbestos strengthening, mostly NA Consumer -58 UK Continental Europe -121 • Releases in UK other than asbestos UKISA -208 • Releases elsewhere Rest of the World -79 Centrally Managed Busi
Slide 52: Strengthening in North America
Strengthening in North America Driven by 3 key elements Prior year in USD millions devt of the new process: • More conservative assumptions NA Corporate 2,565 NA Consumer -58 • Detailed data segmentation Continental Europe -121 • Peer reviews UKISA -208 Rest of the World -79 Centrally Managed Busine
Slide 53: US reserves positioned well compared to industry
The increase has positioned our US reserves well compared to industry IBNR as percentage of total reserves by accident year as of Dec 31, 2004 – all lines combined 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Zurich US Industry © Zurich Financial Services - Investors’ Day, Ju
Slide 54: Asbestos & environmental reserves reviewed annually
We review asbestos & environmental reserves annually • Total asbestos net reserves are Net Asbestos reserves of USD 2.5bn USD 2.5bn (USD 3.0bn gross) • More than half is UK direct Zurich NA All Other US • Only 9% is North America direct Exposures 9% and is primary coverage 22% US Exposures • Other U
Slide 55: Favourable run-off in other areas
Favourable run-off in other areas • Release based on areas where Prior year in USD millions devt surplus identified NA Corporate 2,565 • Surplus validated by external NA Consumer -58 reviews Continental Europe -121 UKISA -208 • UK release net of asbestos strengthening Rest of the World -79 Centrally
Slide 56: 2004 in summary: strengthened process, strengthened reserves
2004 in summary: strengthened process, strengthened reserves The Zurich Way of Reserving • Strengthened our governance process • Established direct reporting from local actuaries into the Group • Integrated the actuarial function Our actions have addressed reserve issues • Releases from Europe valid
Slide 57: Reserves - Agenda
Reserves - Agenda • Introduction Patrick O’Sullivan • The Zurich Way of Reserving Steve Wilson • The Zurich Way impact in 2004 Steve Wilson • Europe Caroline Barlow • North America Nancy Mueller • Conclusions Patrick O’Sullivan © Zurich Financial Services - Investors’ Day, June 30, 2005 57
Slide 58: Europe - Agenda
Europe - Agenda • The Zurich Way in Europe • Overview of European reserves • Historical run-off of UK reserves • Detail on UK Employer’s Liability • Detail on Asbestos methodology © Zurich Financial Services - Investors’ Day, June 30, 2005 58
Slide 59: How The Zurich Way impacted Europe
How The Zurich Way impacted Europe • Built on our existing processes and procedures • Strengthened and formalised Governance • Greater transparency both within Europe and to Group • Increased sharing of best practice © Zurich Financial Services - Investors’ Day, June 30, 2005 59
Slide 60: Europe - Agenda
Europe - Agenda • The Zurich Way in Europe • Overview of European reserves • Historical run-off of UK reserves • Detail on UK Employer’s Liability • Detail on Asbestos methodology © Zurich Financial Services - Investors’ Day, June 30, 2005 60
Slide 61: European reserves concentrated in UK, Switzerland, Germany and Italy
European reserves are concentrated in UK, Switzerland, Germany and Italy • European reserves of USD 18.2bn European net reserves by country account for 42% of Group as of Dec 31, 2004 reserves Ireland • UK accounts for 37% of 4% Rest 7% European reserves Spain 4% UK • Switzerland is second largest -
Slide 62: Major lines are motor and liability
Major lines are motor and liability • Motor spread across all countries European net reserves by line of • Liability concentrated in UK and business as of Dec 31, 2004 Corporate segment Other • UK Employer’s Liability reserves 13% amount to USD 3.3bn (50% of Europe liability reserves) Property Liabi
Slide 63: Europe - Agenda
Europe - Agenda • The Zurich Way in Europe • Overview of European reserves • Historical run-off of UK reserves • Detail on UK Employer’s Liability • Detail on Asbestos methodology © Zurich Financial Services - Investors’ Day, June 30, 2005 63
Slide 64: UK all lines case incurred loss ratio development
UK all lines case incurred loss ratio development trends lower than ultimate selections 90% 80% 70% 60% 50% Case incurred loss ratios 40% 30% 1 3 5 7 9 Ultimate 1997 • Case incurred ratios peak in year 4 and then decline • Positive IBNR covers any tail development © Zurich Financial Services - Inves
Slide 65: UK all lines case incurred loss ratio development
UK all lines case incurred loss ratio development trends lower than ultimate selections 90% 80% 70% 60% ultimate 50% Case incurred loss ratio loss ratios 40% 30% 1 3 5 7 9 Ultimate 1997 • Case incurred ratios peak in year 4 and then decline • Positive IBNR covers any tail development © Zurich Financ
Slide 66: UK all lines case incurred loss ratio development
UK all lines case incurred loss ratio development trends lower than ultimate selections 90% IBNR is difference between incurred and ultimate loss 80% 70% 60% ultimate 50% Case incurred loss ratio loss ratios 40% 30% 1 3 5 7 9 Ultimate 1997 • Case incurred ratios peak in year 4 and then decline • Pos
Slide 67: UK all lines case incurred loss ratio development
UK all lines case incurred loss ratio development trends lower than ultimate selections 90% 80% 70% 60% 50% Development peaks 40% around year 4 30% 1 3 5 7 9 Ultimate 1996 1997 1998 1999 2000 © Zurich Financial Services - Investors’ Day, June 30, 2005 67
Slide 68: UK all lines case incurred loss ratio development
UK all lines case incurred loss ratio development trends lower than ultimate selections 90% 80% 70% 60% Ultimates allow for development in the tail 50% Development peaks 40% around year 4 30% 1 3 5 7 9 Ultimate 1996 1997 1998 1999 2000 © Zurich Financial Services - Investors’ Day, June 30, 2005 68
Slide 69: UK all lines case incurred loss ratio development
UK all lines case incurred loss ratio development trends lower than ultimate selections 90% 80% 70% 60% 50% 40% Improving trends from strong rate increases 30% 1 3 5 7 9 Ultimate 1996 1997 1998 1999 2000 2001 2002 2003 2004 © Zurich Financial Services - Investors’ Day, June 30, 2005 69
Slide 70: UK all lines case incurred loss ratio development
UK all lines case incurred loss ratio development trends lower than ultimate selections 90% 80% 70% 60% 50% Ultimates more conservative on recent 40% Improving trends from accident years strong rate increases 30% 1 3 5 7 9 Ultimate 1996 1997 1998 1999 2000 2001 2002 2003 2004 © Zurich Financial Serv
Slide 71: UK all lines ultimate loss ratios: historically positive run-off
UK all lines ultimate loss ratios: Historically run-off has been positive Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Ultimates at year-end 2000 73% 82% 91% 88% 76% 2001 73% 81% 90% 88% 79% 80% 2002 72% 80% 87% 87% 81% 78% 75% 2003 72% 80% 87% 87% 80% 75% 71% 65% 2004 71% 80% 86% 86%
Slide 72: Europe - Agenda
Europe - Agenda • The Zurich Way in Europe • Overview of European reserves • Historical run-off of UK reserves • Detail on UK Employer’s Liability • Detail on Asbestos methodology © Zurich Financial Services - Investors’ Day, June 30, 2005 72
Slide 73: Modelling Employer's Liability mainstream reserves
Modelling Employer’s Liability “mainstream” reserves • “Mainstream” reserves are USD 1.4bn • Comprise all claims except long tail disease (Asbestos, Deafness, VWF) • Detailed data segmentation • Data grouped by Nature of Injury code − 7 groups for non-disease claims − 4 groups for short tail disease
Slide 74: Selection of ultimates for prior accident years
Selection of ultimates for prior accident years • Results of methods are compared graphically and ultimate selected • Nature of Injury ultimates combined and compared with projections at overall level • Final selected ultimates take account of all information available • Check progression of ultimat
Slide 75: Selection of ultimate for current accident year
Selection of ultimate for current accident year • Current year is undeveloped so direct projections are volatile • “Loss ratio walk” method is used to roll forward from older, more developed years • This allows for − Rate changes − Claim frequency − Claims inflation − Large claims © Zurich Financial
Slide 76: Estimation of current year loss ratio
Estimation of current year loss ratio current year’s prior year’s large claims Loss ratio large claims current year’s current year’s inflation rate increases +4% 71% 70% -5% +5% 67% 65% -4% +1% current year’s frequency increase prior year’s prior year current year current year’s loss ratio excl larg
Slide 77: Employer's Liability case incurred loss ratio development stable
Employer’s Liability case incurred loss ratio development stable over time 140% 120% 100% 80% 60% 40% Improving trends from 20% strong rate increases 0% 1 3 5 7 9 Ultimate 1996 1997 1998 1999 2000 2001 2002 2003 2004 © Zurich Financial Services - Investors’ Day, June 30, 2005 77
Slide 78: Employer's Liability case incurred loss ratio development stable
Employer’s Liability case incurred loss ratio development stable over time 140% 120% 100% 80% 60% Development peaks 40% around year 4 20% 0% 1 3 5 7 9 Ultimate 1996 1997 1998 1999 2000 2001 2002 2003 2004 © Zurich Financial Services - Investors’ Day, June 30, 2005 78
Slide 79: Employer's Liability case incurred loss ratio development stable
Employer’s Liability case incurred loss ratio development stable over time Ultimates allow for 140% development in the tail 120% 100% 80% 60% 40% 20% 0% 1 3 5 7 9 Ultimate 1996 1997 1998 1999 2000 2001 2002 2003 2004 © Zurich Financial Services - Investors’ Day, June 30, 2005 79
Slide 80: Employer's Liability historical run-off generally positive
Even for Employer’s Liability historical run- off has generally been positive Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Ultimates at year-end 2000 87% 102% 124% 122% 116% 2001 84% 99% 120% 124% 132% 122% 2002 84% 99% 118% 125% 137% 122% 99% 2003 83% 98% 112% 122% 132% 112% 89% 75% 2
Slide 81: Europe - Agenda
Europe - Agenda • The Zurich Way in Europe • Overview of European reserves • Historical run-off of UK reserves • Detail on UK Employer’s Liability • Detail on Asbestos methodology © Zurich Financial Services - Investors’ Day, June 30, 2005 81
Slide 82: Asbestos reserves and survival ratios as of Dec 31, 2004
Asbestos reserves and survival ratios as of Dec 31, 2004 in USD million Gross reserves Net reserves Survival ratio UK Asbestos 1,363 1,363 41 years US Asbestos in UK 694 380 32 years Other Asbestos 907 781 13 years Total 2,964 2,524 25 years • Survival ratio calculated as latest net reserves divided
Slide 83: UK Asbestos - key features
UK Asbestos - key features • Exposure arises in UK under Employer’s Liability policies • Claims are modelled separately by claim type − Mesothelioma − Lung Cancer − Asbestosis − Pleural thickening − Pleural plaques • Mesothelioma is the signature disease for asbestos • Typical latency period for “me
Slide 84: UK Asbestos - key features (cont.)
UK Asbestos - key features (cont.) • Key assumptions are − the number and shape of future claims − current average claims cost − claims inflation to date of payment • Long latency means meso claims will continue for many years • Although exposure reduced in 1970s, number of cases has not yet peaked
Slide 85: Industry best practice for modelling future meso claims
We have adopted industry best practice to modelling future meso claims • Health and Safety Executive (HSE) benchmark projections of meso deaths updated in December 2003 • Update used by UK actuarial working party in 2004 to develop industry approach • We participated actively in the working party an
Slide 86: More robust meso claim modelling included additional testing
More robust meso claim modelling included additional testing • Reasonableness check on projection shape • Actual vs. expected comparison to test projection accuracy over time • Zurich claims data calibrated against population figures • Used Zurich exposure model to check the selected projection © Zu
Slide 87: Modelled deaths by birth cohort
Modelled deaths by birth cohort UK population registered deaths from mesothelioma 20'000 Projected population future deaths 15'000 Population number of registered Num ber of Deat hs deaths to 2004 10'000 5'000 0 1910- 1920 - 1930 - 1940 - 1950 - 1960 - 1970 - 1980 - 1990 - 2000 - 1919 1929 1939 1949
Slide 88: UK long-tail reserves - summary
UK long-tail reserves - summary • The Zurich Way of Reserving reinforces existing approach • Conservatism in IBNR assumptions • Detailed modelling enables us to monitor explicit assumptions against emerging claims experience • Asbestos modelling is industry best practice • Asbestos survival ratio of
Slide 89: Reserving - Agenda
Reserving - Agenda • Introduction Patrick O’Sullivan • The Zurich Way of Reserving Steve Wilson • The Zurich Way impact in 2004 Steve Wilson • Europe Caroline Barlow • North America Nancy Mueller • Conclusions Patrick O’Sullivan © Zurich Financial Services - Investors’ Day, June 30, 2005 89
Slide 90: North America - Agenda
North America - Agenda • The Zurich Way in North America • Overview of North American reserves • Workers’ Compensation reserves • Commercial Multi Peril reserves • Summary © Zurich Financial Services - Investors’ Day, June 30, 2005 90
Slide 91: How The Zurich Way impacted North America
How The Zurich Way impacted North America • We exchanged best practice with European colleagues • Many aspects of The Zurich Way of Reserving were already in operation • It has strengthened and formalized our Governance • We adopted the new global standards including taking a more conservative appro
Slide 92: North America - Agenda
North America - Agenda • The Zurich Way in North America • Overview of North American reserves • Workers’ Compensation reserves • Commercial Multi Peril reserves • Summary © Zurich Financial Services - Investors’ Day, June 30, 2005 92
Slide 93: North America General Insurance Reserves
North America General Insurance Reserves Net Reserves as Prior-year in USD billions of Dec 31, 2004 development Zurich Group 43.5 2.0 NA Corporate 17.3 2.6 US Statutory 12.1 1.8 • NA Corporate 40% of Zurich ‘s overall reserves • Zurich US legal entity 70% of NA Corporate • Canada, Zurich Specialties
Slide 94: US statutory reserves by line of business
US statutory reserves by line of business • Diverse portfolio of businesses Net Reserves as of Dec 31, 2004 reflecting US Commercial market Asbestos & • Net reserves USD 12bn Property/Other Environmental 5% 3% • Gross reserves USD 23bn Med Mal • 25% of cessions to Zurich 3% affiliate companies Comm
Slide 95: 2004 prior year development concentrated in long tail lines
2004 prior year development concentrated in long tail lines in soft market years Source of prior year development Prior year development by line of • 67% from accident years 1999- business 2001 All Other Lines • 65% from segments that were 1% A&E Comm Auto 1% exited in 2002/2003, e.g. 4% − Small res
Slide 96: Reserving issues were caused by a number of factors
The reserving issues were caused by a number of factors Adverse claims trends • Increased litigation • Claim severity inflation • Increased frequency of large claims • High ultimate loss ratios • Steeper development from changes in coverage & terms © Zurich Financial Services - Investors’ Day, June
Slide 97: Reserving issues were caused by a number of factors
The reserving issues were caused by a number of factors Adverse claims trends All lines case incurred loss ratio • Increased litigation Net development before stop loss • Claim severity inflation 100% • Increased frequency of large claims 80% 60% • High ultimate loss ratios • Steeper development fro
Slide 98: Reserving issues were caused by a number of factors
The reserving issues were caused by a number of factors Adverse claims trends All lines case incurred loss ratio • Increased litigation Net development before stop loss • Claim severity inflation 100% • Increased frequency of large claims 80% 60% • High ultimate loss ratios • Steeper development fro
Slide 99: Reserving issues were caused by a number of factors
The reserving issues were caused by a number of factors Adverse claims trends All lines case incurred loss ratio • Increased litigation Net development before stop loss • Claim severity inflation ...but shape of 100% • Increased frequency of development changed large claims 80% 60% • High ultimate l
Slide 100: The Zurich Way approach responded to these issues and reduces volatility
The Zurich Way approach responded to these issues and reduces volatility going forward • Strengthened reserves and processes • Close monitoring of industry factors • Consistent underwriting, claims handling and reserving practices that improve predictability of ultimate results • Growth in hard mark
Slide 101: Comparing the strength of initial reserves over time
We can compare the strength of our initial reserves over time… Example: Zurich US – all lines net before stop loss Actual initial reserve-to-ultimate at age 12 months 80% 75% 70% 65% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years © Zurich Financial Services - Investors’ Day, Ju
Slide 102: … and with the benefit of hindsight
… and with the benefit of hindsight Example: Zurich US – all lines net before stop loss Hindsight initial reserve-to-ultimate as of 2004 80% 75% 70% 65% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years • Strong position on recent accident years protects against adverse claims tre
Slide 103: Comparing the results with the Industry
We can compare the results with the Industry • Common benchmarks measure relative strength of reserve position • Comparison of gross reserves eliminate distortion from reinsurance differences; net reserves show similar patterns • No single measure tells the whole story − Ratio of reserves-to-premium
Slide 104: Reserve-to-premium ratios show strength in each accident year
Reserve-to-premium ratios show strength in each accident year Gross reserves-to-premium by accident year as of Dec 31, 2004 – all lines combined 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Zurich US Industry © Zurich Financial Services - Investors’ Day, June 30, 2005 104
Slide 105: Reserves-to-ultimate loss shows strength in each accident year
Reserves-to-ultimate loss also shows strength in each accident year Gross reserves-to-ultimate loss by accident year as of Dec 31, 2004 – all lines combined 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Zurich US Industry Zurich’s reserves are stronger in virtually every year
Slide 106: Larger percentage of IBNR to overall reserves indicates strength
Zurich has a larger percentage of IBNR to overall reserves further indicating strength Gross IBNR as percentage of total reserves by accident year as of Dec 31, 2004 – all lines combined 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Zurich US Industry The differential in years
Slide 107: North America - Agenda
North America - Agenda • The Zurich Way in North America • Overview of North American reserves • Workers’ Compensation reserves • Commercial Multi Peril reserves • Summary © Zurich Financial Services - Investors’ Day, June 30, 2005 107
Slide 108: US Workers' Compensation internal changes in addition to market effects
US Workers’ Compensation experienced internal changes in addition to market effects • Integration of US legal entities in 1999-2000 led to changes in claims handling • 2000-2001 implemented MIRA case reserving tool • Development patterns 1998-2001 – different than 1995-1997 • Indications that develo
Slide 109: Workers' Compensation development for case incurred losses
We analyzed our Workers’ Compensation1 development in detail for case incurred losses ... Case incurred patterns differ 120% significantly across accident years 100% 80% 60% 40% 20% 0% 1 2 3 4 5 6 7 8 9 10 ult 1995 1998 2000 2002 2003 2004 • Case reserving procedures and industry factors impacted de
Slide 110: Workers' Compensation patterns for paid losses only
… and Workers’ Compensation1 patterns for paid losses only Paid patterns impacted less by changes 120% and stabilized more quickly 100% 80% 60% 40% 20% 0% 1 2 3 4 5 6 7 8 9 10 ult 1995 1998 2000 2002 2003 2004 • Paid development patterns better predictor of Workers’ Comp. ultimate losses 1 Net befor
Slide 111: Workers' Compensation reserves strong relative to historic trends
Resulting in Workers’ Compensation reserves that are strong relative to historic trends… Zurich US – Workers’ Compensation net before stop loss Actual initial reserve-to-ultimate at 12 months 90% 85% 80% 75% 70% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years More conservative reser
Slide 112: Strong with hindsight development
… and are strong with hindsight development Zurich US – Workers’ Compensation net before stop loss Ratio of hindsight reserve-to-current ultimate 90% 85% 80% 75% 70% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years Strong position on recent accident years protects against adverse cla
Slide 113: Comparisons to industry show we are now in line
Comparisons to industry shows we are now clearly in line Gross reserves-to-ultimate loss by accident year – Workers’ Compensation 100% 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Zurich US Industry Zurich’s Workers’ Compensation reserves as % of ultimate by accident year is
Slide 114: North America - Agenda
North America - Agenda • The Zurich Way in North America • Overview of North American reserves • Workers’ Compensation reserves • Commercial Multi Peril reserves • Summary © Zurich Financial Services - Investors’ Day, June 30, 2005 114
Slide 115: Commercial Multi Peril covers many customer segments
Commercial Multi Peril covers many customer segments • Small Residential General Gross earned premium Construction 1600 − 90% liability 1400 − 10% property 1200 − Liability exhibits latent 1000 development 800 − Began exiting in mid 2002 600 • Other CMP 400 200 − 65% property 0 − 35% liability 1995
Slide 116: Hindsight view for total CMP distorted by change in mix
Hindsight view for total CMP is distorted due to the change in mix of business ... Zurich US – Total Commercial Multi-Peril net before stop loss Ratios of hindsight reserve-to-current ultimate as of Dec 31, 2004 90% 80% 70% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years Reserve
Slide 117: Hindsight view for total CMP distorted by change in mix
Hindsight view for total CMP is distorted due to the change in mix of business ... Zurich US – Total Commercial Multi-Peril net before stop loss Ratios of hindsight reserve-to-current ultimate as of Dec 31, 2004 90% 80% 70% 60% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years Our und
Slide 118: Hindsight view by segment: Construction CMP
Hindsight view by segment shows strength of current reserves and impact of mix change… Zurich US – Construction Commercial Multi-Peril net before stop loss Ratios of hindsight reserve-to-current ultimate as of Dec 31, 2004 100% 90% 80% 70% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Y
Slide 119: Hindsight view by segment: Other CMP
Hindsight view by segment shows strength of current reserves and impact of mix change… Zurich US – Other Commercial Multi-Peril net before stop loss Ratios of hindsight reserve-to-current ultimate as of Dec 31, 2004 80% 70% 60% 50% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Accident Years • B
Slide 120: Compared to Industry, Zurich CMP reserves are strong
...and compared to Industry, Zurich Commercial Multi Peril reserves are strong Gross reserves-to-ultimate loss by accident year as of Dec 31, 2004 – Commercial Multi Peril 80% 60% 40% 20% 0% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 Zurich US Industry • The differential is largest where we h
Slide 121: North America - Agenda
North America - Agenda • The Zurich Way in North America • Overview of North American reserves • Workers’ Compensation reserves • Commercial Multi Peril reserves • Summary © Zurich Financial Services - Investors’ Day, June 30, 2005 121
Slide 122: With new process we monitor loss ratios monthly
With new process we monitor loss ratios monthly Zurich US – All lines case incurred loss ratio net before stop loss 80% 60% 40% 20% 0% 1 2 3 4 5 6 9 12 14 15 18 21 24 26 27 30 33 36 38 39 42 48 Ult Age in months 2002 2003 2004 2005 • Detailed studies and 2004 actions validated strong performance of
Slide 123: US reserves - summary
US reserves - summary • The Zurich Way of reserving resulted in significant strengthening of reserves and improved governance • Year-end 2004 reserves are strong relative to our history and relative to the industry • The detailed studies and actions in 2004 validated the performance of recent accide
Slide 124: Reserving - Agenda
Reserving - Agenda • Introduction Patrick O’Sullivan • The Zurich Way of Reserving Steve Wilson • The Zurich Way impact in 2004 Steve Wilson • Europe Caroline Barlow • North America Nancy Mueller • Conclusions Patrick O’Sullivan © Zurich Financial Services - Investors’ Day, June 30, 2005 124
Slide 125: Rigorous approach has laid foundation for sustainable profitable growth
Our rigorous approach has laid the foundation for sustainable profitable growth • Transparency and clear accountability lines Strengthened reserve governance • Strong, integrated actuarial function • End-to-end oversight by Group Chief Actuary • Regular internal external reviews Best practice actuar
Slide 126: What this means for Zurich
What this means for Zurich John Amore CEO, General Insurance
Slide 127: Integrated approach to our technical functions
We have an integrated approach to our technical functions… Under- l writing r ia t ua Ac Claims © Zurich Financial Services - Investors’ Day, June 30, 2005 127
Slide 128: Strong platform for excellence in execution
… which provides a strong platform for excellence in execution Underwriting Claims Actuarial Examples • Accurate Technical • Accurate loss costs • Conservative Price assumptions • Timely product • Early detection of • Early detection of changes in response to emerging issues trends changed condition
Slide 129: Integrated approach and governance will allow strong profitability
Our integrated approach and governance will allow us to deliver strong profitability We have established • New governance structure l U/W •U/W • Strong integrated ia ar approach to our technical ctu A functions Governance • Best practices in reserving, claims and underwriting functions Claims •Claim
Slide 130: Q&A
@ ZURICH O&A
Slide 131: Appendix
@ ZURICH Appendix
Slide 132: UK all lines case incurred loss ratios
UK all lines case incurred loss ratios Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Development Year 1 60.4% 65.7% 72.2% 67.4% 61.2% 56.7% 51.5% 39.5% 38.6% 2 66.8% 74.8% 80.6% 79.6% 72.2% 67.5% 59.9% 46.0% 3 68.7% 76.0% 81.9% 82.0% 75.1% 68.1% 60.8% 4 71.5% 78.7% 85.0% 85.1% 77.1% 69.
Slide 133: UK Employer's Liability case incurred loss ratios
UK Employer’s Liability case incurred loss ratios Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Development Year 1 33.3% 38.2% 40.8% 40.4% 44.6% 41.1% 27.5% 19.9% 17.6% 2 66.8% 75.6% 84.3% 88.5% 95.8% 83.7% 52.1% 36.5% 3 79.6% 88.2% 102.4% 107.8% 117.4% 91.2% 59.3% 4 88.7% 100.2% 119.2%
Slide 134: Zurich US all lines case incurred loss ratio
Zurich US all lines case incurred loss ratio net before stop loss Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Development Year 1 41.7% 41.5% 45.4% 45.3% 42.6% 42.7% 32.7% 27.2% 27.2% 2 54.7% 55.5% 61.2% 62.4% 64.9% 60.0% 47.8% 39.6% 3 62.0% 65.7% 71.1% 77.4% 79.0% 72.2% 58.9% 4 67.1%
Slide 135: Zurich US Workers' Compensation case incurred loss ratio
Zurich US Workers’ Compensation case incurred loss ratio net before stop loss Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Development Year 1 30.5% 35.5% 34.3% 36.2% 39.4% 40.7% 31.9% 25.8% 22.8% 2 42.5% 49.7% 54.8% 60.0% 67.9% 61.4% 50.2% 38.2% 3 48.5% 57.6% 66.4% 73.2% 84.4% 75.0% 57
Slide 136: Zurich US Workers' Compensation paid losses
Zurich US Workers’ Compensation paid losses net before stop loss Accident Year 1996 1997 1998 1999 2000 2001 2002 2003 2004 Development Year 1 12.0% 15.3% 15.3% 15.9% 18.5% 18.2% 13.4% 9.9% 8.3% 2 27.2% 33.5% 36.0% 42.1% 47.4% 41.3% 29.4% 22.3% 3 36.1% 43.9% 48.5% 56.0% 63.8% 55.9% 39.0% 4 41.6% 51.
Slide 137: Zurich US industry definition
Zurich US industry definition Zurich US industry comparison is based on the following 39 US companies using Schedule P data Allianz Insurance Company Group Sentry Insurance a Mutual Co Group Anthem Ins Companies Inc Shelter Insurance Cos Group Arch Capital Grp Inc St Paul Travelers Companies and Aff